America's beer war is getting ugly

American craft brewers have been the most spectacular economic
success story since the Financial Crisis. Forget the slow-growth
or sinking-into-quagmire stories typical in many other
sectors. American craft brewers have become a global phenomenon,
largely due to their excellent brewskis and astute marketing.

Yet total beer sales in the US have been declining for years, as
major brands have been losing ground. In 2015, despite population
growth, beer sales edged down another 0.2% to 196.7 million
barrels, according to the Brewers Association, even as craft brewers
have booked double-digit sales gains year after year, including
12.8% in 2015.

But here’s the problem with craft brewers: Everyone is now doing
it. The Big Money is piling in. Private Equity firms and the
largest multinational brewing conglomerates in the world are
buying out craft brewers and funding new ones.

And this is what happened: As the Financial Crisis wound down in
2011, there were 1,176 surviving craft brewers in the US, ranging
from tiny brewpubs to large craft brewers, such as Sierra Nevada.
Then all heck broke loose. QE unleashed the Big Money. The number
of breweries soared. Last year alone, about 1,000 new breweries
saw the light of the day. This year as of June, there were
already 4,656. By now, they’re about 4,800. And according to the
Brewers Association, and additional 2,200 are planned:

WolfStreet

Remember: Total beer sales in the US are still
declining! Every barrel of beer sold in the US comes out
of someone else’s hide. So it’s getting tough out there.

There have always been brewers and brewpubs that didn’t make it
and shut down, while the successful ones picked up momentum and
grew and grew. But now, one of the best known brands with
enormous momentum, Stone Brewing Co., founded in 1996, and by
2015 the 10th largest craft brewer among this ocean of craft
brewers, announced layoffs.

The company, based in San Diego County, CA, has been a huge
success story. With 325,000 barrels of beer sales in 2015,
according to the Brewers Association, it is the third largest
brewer in California, after Sierra Nevada and Lagunitas – in
which Heineken International, the world’s third-largest brewing
conglomerate, took a 50% stake a year ago [read… Buyout Binge in American Craft Brew Revolution
Gets Personal].

Stone Brewing opened a brewery in Germany, “Stone Berlin,” where
utterly bewildered locals are discovering to their greatest
surprise a superb YankeeBier. The company is
opening a brewery in Richmond, Virginia, where potable water is
more plentiful than in Southern California. It’s planning to open
another location in Napa, California. This brewer rocks!

But premonitions already surfaced this month when co-founder Greg
Koch said in an interview that “commodity breweries” were
undercutting Stone and other craft brewers by offering kegs to
retail accounts at “predatory” prices. And he admitted that
growth projections for 2016 have been revised lower several times
this year.

In August, he’d been replaced by Dominic Engels as CEO.

After laid-off employees began posting their stories on Facebook,
Engels released a statement on Thursday afternoon, according to
Draft, confirming that the company would lay off
“approximately 5%” of its 1,200 employees. So that might be 60
people.

But that number may be larger. Former Stone brewmaster Mitch
Steele lamented on Facebook: “Feeling shocked and incredibly sad
for many of my friends at Stone Brewing Co. How did it come to
this?” He figured “75+ layoffs.”

In the statement, which Draft published in full, the
company explained:

Due to an unforeseen slowdown in our consistent growth and
changes in the craft beer landscape, we have had to make the
difficult decision to restructure our staff….

[T]he larger independent craft segment has developed
tremendous pressures. Specifically, the onset of greater
pressures from Big Beer as a result of their acquisition
strategies, and the further proliferation of small, hyper-local
breweries has slowed growth.

With business and the market now less predictable, we must
restructure to preserve a healthy future for our company. Even
given this unfortunate circumstance, we will continue to be
fiercely independent and, importantly, Stone remains one of the
largest – if not the largest – employers in the craft brewing
segment.

And “in summary,” the company wanted to “emphasize” among
other things: “A recent decline in domestic growth for the
category and for Stone has forced us to restructure in order to
preserve our independence in an increasingly competitive
category.”

Harsh words for an industry that knew only unlimited
possibilities.

“Given the strength of Stone’s brands and how successful they’ve
been,” Bart Watson, chief economist of the Brewers Association,
told the Los Angeles Times, “it shows there are
challenges that every craft brewery faces.”

It doesn’t take a genius to figure it out. With total beer sales
in the US declining for years, craft brewers have to take sales
away from Big Beer. But Big Beer has seen the writing on the wall
and is muscling into the space with a series of acquisitions of
brewers that they’re then corporatizing with access to their
distribution channels. Private equity firms have piled in too.
With gold-rush mentality, new brewers get funded on a daily
basis.

This is called overcapacity. It doesn’t just wreak havoc
in the Chinese steel industry or the global container
shipping industry. It hits everywhere where Big Money, having
become reckless after years of central-bank QE and
zero-interest-rate policies, suddenly piles in to make a buck.